Napolitano looks at money.
Cash may be king if you’re in the middle of an economic meltdown and your favorite investments are selling for prices far lower than you think they may be worth. But in today’s economy, with interest rates still near record lows, is cash still king? Like many financial questions, the answer is maybe.
Cash is king to those who want to assume absolutely no volatility or investment risk. The major downside is your guaranteed loss of buying power with the money invested in cash. For most cash equivalent investments opportunities today, the yield’s been lower than the quoted rate of inflation published in government statistics. ‘Cash is King’ covers a wide spectrum of investors from the wealthy to those who have very little savings. Let’s start with the small guys.
If you have undersaved, and you’re hoping to make up for lost time, exposing your few assets to excessive risk to play catch up isn’t wise. A better idea is to spend less, make more and save more. With too little to start with, a sudden decline in the value of your riskier investments may make playing catchup forever unachievable.
On the other hand, if you have a substantial portfolio and net worth, keeping assets in low yielding cash may give you sleep-at-night benefits. If your forecast shows that you’d never miss a beat if your investment earnings are less than the rate of inflation, then you likely can afford having 100% of your assets invested this way. Thankfully, and maybe because of this thought process, most wealthy families do not invest 100% in cash or cash equivalents.
But a good use of cash for wealthy families is to supplement your annual income and spending needs. For example, let’s say that your total cost of living is $300,000 per year and you have guaranteed sources of income of $150,000. You will draw an additional $150,000 per year from your portfolio. Many families prefer to invest those shorter term cash needs into something guaranteed so they’re unlikely to have to sell investments at a point when they may have declined in value. How much cash to have is like judging beauty- it’s in the eyes of the beholder.
If you have a significant portfolio, and are very conservative, perhaps 10–15 years’ worth of cash is best. If your risk tolerance is higher, then maybe 3–5 years of cash needs on hand makes more sense. But the amount is something that differs for every family and shouldn’t be based on hearsay or rules of thumb.
Now that you’ve figured out how much cash you should have on hand, what are you going to do with it? A basic money market or savings account isn’t advised as those yields are very low. A blend of high yield money markets, CDs and ultra-short bond funds with a very low duration should have a higher yield.